A spot market market may comprise a market in which commodities are bought and sold for cash and delivered immediately. As shown in FIG. 1, the spot market may include real-time trading for same day delivery or day-ahead trading for delivery the following day. Examples of the commodities which may be bought or sold in a spot market include, for example, electricity, natural gas, grain, gold, crude oil, or RAM chips. In the electricity context, organized spot markets are an important component of most, if not all, competitive electricity markets. These markets may be facilitated by a Spot Market Operator (or Power Exchange), which is often combined with the Transmission System Operator in a single organization—referred to in the United States as a Regional Transmission Organization (RTO). There are several RTOs in different regions of the United States. Currently the RTO also acts as the central counter-party for many of the markets it facilitates, which means that it is the buyer to every seller and the seller to every buyer.
Referring to FIG. 2, there is shown a block diagram 200 of an electricity spot market. As discussed above, the RTO 210 may include Spot Market Operator 212 and System Operator 220. The Spot Market Operator 212 may include the functions of trade execution 214, settlement 216, and risk assessment 218. When trading, the Spot Market Operator 212 matches bids to buy electricity with offers to sell electricity. Participants 202 may send bids and offers to the Spot Market Operator 212. The bids and offers are comprised of a series of quantity and price pairs, monotonically increasing for offers (such as 50 MWh @ $35, 100 MWh @ $60, . . . ) and monotonically decreasing for bids.
Participants 202 may include those parties who trade in the wholesale electricity market. The traders may be broken into two general classes: (1) industry participants who are involved in the production and/or consumption of energy, generally using the forward market for the purpose of hedging financial risk; and (2) speculators who speculate upon or arbitrage the market price, with no intention, and often no capability, of taking delivery. In most cases, only the industry participants are involved in spot market trading, as these markets are intended to result in physical delivery. As shown in FIG. 2, examples of Participants 202 may include Wholesale Trading Businesses 204, Wholesale Production Businesses 206, and Wholesale Purchasing Businesses 208.
When trading, electricity spot markets transact via a multilateral auction in which supply offers (all sellers) and demand bids (all buyers) are matched in aggregate. Referring to FIG. 3, there is shown a graph, with two curves of quantity versus price, a supply curve and a demand curve. FIG. 3 illustrates the simple matching of supply and demand curves, based upon offers and bids respectively, in order to determine scheduled/dispatched quantity and marginal price. This figure is a simplification, showing how bids and offers would be matched in a system without physical constraints. In most markets this matching process is also subject to the constraints of network physics, and solved as an optimization problem.
As discussed above, the spot market may include a real-time market and/or a day-ahead hourly market. The real-time market balances supply and demand in close to real time, generally every five minutes as shown in FIG. 4, based on bids and offers and subject to the physical constraints of generation, load, and the transmission system. Specifically, the real-time market may utilize a “constrained” multi-lateral auction, in which supply and demand are matched in aggregate subject to physical constraints. The term “constrained” refers to a potential for congestion in the system, and as a result locational pricing of the system. The day-ahead hourly market provides an opportunity for participants to lock in price and quantity on the day before real-time operations. Like the real-time market, the day-ahead market is also often a “constrained” multi-lateral auction. The matching process for the day-ahead market produces quantities and marginal prices for each time period (usually an hour as shown in FIG. 4) and location (if applicable).
Referring back to FIG. 2, after execution of a trade, System Operator 220 may use the assets of Transmission Owners 232 in order to transmit electricity in accordance with the dispatch determined by the real-time market. Because more or less electricity may actually be produced or consumed than what was agreed to during trading, settlement 216 is performed by the Spot Market Operator 212 after the event. Settlement 216 uses Measurement and Verification 230 in order to determine the amount of electricity transferred. For a number of reasons, including delays in obtaining accurate measurement data for settlement, and historic convention, electricity spot market operators in North America have typically operated on a monthly billing cycle. Bills are sent approximately one week after the period being settled, with payment due approximately two weeks after that. This lengthy process results in 20-50 days of uncollected billings, depending upon which day in the settlement cycle the market is at. The RTO attempts to reduce its exposure by requiring some Participants 202 to post collateral. The amount that a Participant 202 posts depends on a Risk Assessment 218. The Risk Assessment 218 examines the credit ratings of the Participant 202, and any financial exposures it has in markets operated by the RTO. However, the RTO still extends unsecured credit to many participants, which may be equal to part or all of the participant's exposure, leaving the RTO at risk for the difference between potential exposure and posted collateral. Additionally, the Risk Assessment analysis is limited to markets and other payments facilitated through that RTO. Exposures of the participant in spot markets operated by other RTOs, or in futures markets, are not considered, limiting the value of Risk Assessment 218.
In the event of a Participant default, the RTO is held whole, with the default amount socialized amongst all remaining market participants according to pre-defined rules, which may differ by RTO. FIG. 5 shows an example of socialization by load/generation-ratio share. These exposures are unpredictable and unhedgeable. In an attempt to reduce the occurrence and severity of such defaults, RTOs have prudential processes, such as Risk Assessment 218, in place to manage credit risk. However, the processes currently implemented by many spot markets are not sufficient to manage the risks inherent in the trading of highly volatile commodities such as electricity.
Another shortcoming of the above-described system includes the method and frequency of credit limit determination. The procedures for determining credit limits, of which unsecured credit is generally a part, often do not follow a standard credit scoring methodology, leading to inconsistent credit assessments, and preventing automation. In addition, unsecured credit is often established based solely upon an assessment of a participant's financial standing, without consideration of the collective loss tolerance of the market in the event of default. Moreover, the timeliness of the credit reviews performed by many spot market operators is inadequate—taking place on a monthly, quarterly or annual basis—yet a participant's financial standing can disintegrate in a matter of days.
Still another shortcoming is the timeliness of credit monitoring. In the time interval between trading and the calculation of credit risk, the spot market operator is unaware of participants' true credit exposures. Some spot market operators experience a lag of three or more days in performing this assessment, during which time significant credit exposures can accumulate without the market operator necessarily being aware of them.
Another shortcoming of the above system is the length of the billing period. No matter how sophisticated the monitoring processes in place, the true test of a participant's creditworthiness is whether the participant pays its bill. Until this occurs, all outstanding amounts remain at risk. Many spot markets may operate on a monthly billing cycle. With a delay of approximately 20 days between the end of the settlement month and the bill being payable, plus time for remedy of potential defaults, this can lead to exposures exceeding 50 days of trading activity.
Yet another shortcoming is the fragmentation of risk across markets. As discussed above, the United States has multiple spot markets. This is also the case in Europe. It is not uncommon for companies to participate in a number of these spot markets. Currently, however, credit information about a participant in one spot market is seldom known to the operators of other spot markets. As a result, unsecured credit may be assigned without consideration of potential obligations in other markets. This poses the risk that, although each spot market may have dutifully completed its own credit analysis, the aggregate exposure of a participant may exceed its credit capacity.
Still another shortcoming is the layers of protection in the spot market trading. Currently some, but not all, spot market participants are required to post surety, to supplement their unsecured credit. This provides some protection in the event of default. In most markets, however, once the posted surety has been exhausted, there are no intermediate layers of protection between the defaulting participant and the socialized risk pool of all remaining participants.
Thus, there is a need to have a more secure and cost-efficient method and apparatus for spot market clearing.